Examining Income Expectations in the College and Early Post-College Periods: New Distributional Tests of Rational Expectations

73 Pages Posted: 19 Jan 2021 Last revised: 22 Jun 2023

See all articles by Thomas F. Crossley

Thomas F. Crossley

European University Institute - Economics Department (ECO); Institute for Fiscal Studies

Yifan Gong

Department of Economics,

Todd R. Stinebrickner

University of Western Ontario - Department of Economics

Ralph Stinebrickner

Berea College; University of Western Ontario

Date Written: January 2021

Abstract

Unique longitudinal probabilistic expectations data from the Berea Panel Study, which cover both the college and early post-college periods, are used to examine young adults’ beliefs about their future incomes. We introduce a new measure of the ex post accuracy of beliefs, and two new approaches to testing whether, ex ante, agents exhibit Rational Expectations. We show that taking into account the additional information about higher moments of individual belief distributions contained in probabilistic expectations data is important for detecting types of violations of Rational Expectations that are not detectable by existing mean-based tests. Beliefs about future income are found to become more accurate as students progress through school and then enter the post-college period. Tests of Rational Expectations almost always reject for the in-school period, but the evidence against Rational Expectations is much weaker in the post-college period.

Suggested Citation

Crossley, Thomas F. and Gong, Yifan and Stinebrickner, Todd R. and Stinebrickner, Ralph, Examining Income Expectations in the College and Early Post-College Periods: New Distributional Tests of Rational Expectations (January 2021). NBER Working Paper No. w28353, Available at SSRN: https://ssrn.com/abstract=3768266

Thomas F. Crossley (Contact Author)

European University Institute - Economics Department (ECO) ( email )

Villa San Paolo
Via della Piazzuola 43
50133 Florence
Italy

Institute for Fiscal Studies ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Yifan Gong

Department of Economics, ( email )

1151 Richmond St
London, Ontario N6A 3K7
Canada

Todd R. Stinebrickner

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5B8
Canada

Ralph Stinebrickner

Berea College ( email )

Berea, KY 40404
United States

University of Western Ontario ( email )

1151 Richmond Street
Suite 2
London, Ontario N6A 5B8
Canada

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